Tagged: Cash

Going by an income tax department circular issued yesterday, it appears that you can repay your entire loan amount to any HFC (Housing finance company) or NBFC (Non-banking finance company) in cash provided each instalment is less than Rs 2 lakh. As per the new income tax rule introduced in the last budget, cash payments/receipts of or over Rs 2 lakh are illegal and will attract penalty.

This rule had created confusion as to whether the rule applied to single instalment repayment of loan or to the entire repayment amount. The finance ministry issued a circular dated July 3, 2017, clarifying that the prohibition of cash payment would only apply to repayment of a single loan instalment in cash and not to the aggregate amount.

Section 269ST was introduced in the last budget to discourage the use of large amounts of cash as a step towards controlling generation of black money.

Section 269ST prohibits any person to receive amount of Rs. 2 lakh and above in cash:
(i) In aggregate from a person in a day, or
(ii) In a single transaction, or
(iii) In respect of transactions relating to one event or occasion from a person

Though this gives clarity for determining the applicability of section 269ST, from an individual perspective, he/she has to maintain necessary supporting documents to substantiate any future request from the authorities seeking clarification on the source of cash says Amarpal Chadha, Tax Partner & India Mobility Leader, EY.

The government has also introduced penalty provisions in case of section 269ST is violated.

Section 271DA defines the penalty amount to be paid by the person who receives the amount in cash over the specified limit. The penalty amount as per the law shall be equal to the amount received in cash.

Income Tax department in its circular dated July 3, 2017 has given a clarification regarding the transactions that will fall under the purview of section 269ST in case repayment of loan is done using cash.

The circular states that receipt of repayment of loan by the Non-Banking Finance Companies (NBFC) and Housing Finance Companies (HFC) will fall under the purview of section 269ST clause (b) if the repayment of ‘one’ loan instalment is equal to or above Rs. 2 lakh. “All the instalments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions of section 269ST.” This means that the Rs 2 lakh limit will only be applied to a single loan instalment repayment in cash and not to the total of all the instalments.

The department has received the representations from NBFCs and HFCs seeking clarification regarding the applicability of section 269ST on the repayment of loan whether it will be on one instalment or on the whole loan amount.

The circular has clarified that the NBFC or HFC will end up violating Section 269ST only if they receive a single loan instalment in cash of or over Rs 2 lakh.

The recommendation comes from the Special Investigation Team as part of its effort to clamp down on the use of black money in the economy
Indivjal Dhasmana | New Delhi | August 24, 2016 | Last Updated at 06:38 IST | Business Standard
The government is examining a recommendation by the special investigation team (SIT) to ban cash transactions of over Rs 3 lakh to clamp down on black money, the top Central Board of Direct Taxes (CBDT) official said on Tuesday.

Addressing an Assocham event, CBDT Chairperson Rani Singh Nair also favoured the proposal to advance the presentation of Union Budget to January, saying it will bring in “more efficiency” as the public expenditure will start from first day of the financial year. A key international tax official also said India-Singapore tax treaty would be broadly on the same lines as that with Mauritius, though there could be some minor differences. On banning cash transactions of over Rs 3 lakh, Nair said, “SIT recommendations are under consideration.” The income-tax department, she said, has already put a one per cent tax, to be collected at source (TCS), on cash transactions of over Rs 2 lakh. Quoting PAN is also mandatory for any mode of payment. “All these aspects are part of SIT recommendations to stop use of cash in the economy,” she said.

CBDT had earlier clarified that no tax would be collected at source when cash component of the payment for goods and services is less than Rs 2 lakh even if the total consideration is more than this amount.

The SIT, headed by retired judge M B Shah, last month submitted its fifth report to the Supreme Court on steps needed to curb black money. Noting that a large amount of unaccounted wealth is stored in cash, the SIT said: “Having considered the provisions which exist in this regard in various countries and also having considered various reports and observations of courts regarding cash transactions, the SIT felt that there is a need to put an upper limit to cash transactions.” It recommended a total ban on cash transactions of Rs 3 lakh and above and that “an Act be framed to declare such transactions as illegal and punishable under law”.

SIT had also suggested an upper limit of Rs 15 lakh on cash holding. In case any person or industry requires holding more cash, it may obtain necessary permission from the Commissioner of Income Tax of the area, it had recommended.

Nair said: “There has been a change in the mindset of young people…These young people don’t want to hoard money any more, something that has to be done if it is black. If they have money, they want to flaunt it. This is a change from the previous mindset of people hoarding black money.”

The chairperson also said that the goods and services tax would reduce generation of black money.

A money lender counts Indian rupee currency notes at his shop in Ahmedabad, India, in this May 6, 2015 file photo.Image copyrightReuters

There is no question that India has the most positive economic story on the planet.

Buoyed by increased manufacturing output, India’s economy grew by 7.4% in the third quarter of 2015, the fastest growth of any major country in the world.

But there is a dark side to India’s success, says one of the country’s most eminent economists.

Kaushik Basu, the chief economist of the World Bank and former chief economic adviser to the Indian government, says the nation’s tradition of petty corruption helped India avoid the worst of the banking crisis that has crippled most other large economies in the last few years.

It is an extraordinary claim for such an influential figure to make but, as he says in his new book, An Economist in the Real World, “economics is not a moral subject”.

His argument is that the pervasive use of “black money” – illegal cash, hidden from the tax authorities – created a bulwark against a crisis in the banking sector.

Let me explain.

Kaushik Basu participates in a discussion about the bank’s goal of reducing poverty in an unequal world economy at the World Bank Headquarters October 8, 2014Image copyrightGetty Images

Mr Basu says dirty money saved India from the financial crisis that engulfed the rest of the world

Back in the last years of the noughties India’s economy was looking just as frothy as the rest of the world.

It had been growing at an astounding 9% a year for the three years to 2008.

What’s more, India’s growth had been fuelled, at least in part, by a dramatic housing boom.

Between 2002 and 2006 average property prices increased by 16% a year, way ahead of average incomes, and faster even than in the US.

The difference in India is that all this “irrational exuberance” did not end in disaster.

Dirty money

There was no subprime loans crisis to precipitate a wider crisis throughout the banking sector.

So the big question is why not.

There were some shrewd precautionary moves by India’s central bank, concedes Mr Basu, but he says one important answer is all that dirty money.

In most of the world the price you pay for a property is pretty much the price listed in the window of the local realtor or estate agent.

Not in India.

Here a significant part of almost all house purchases are made in cash.

And because the highest denomination note in India is 1,000 rupees, ($15; £10) it isn’t unusual for a buyer to turn up with – literally – a suitcase full of used notes.

This is how it works.

Let’s say you like the look of a house that is for sale. You judge it is worth – for argument’s sake – 100 rupees.

The chances are the seller will tell you he will only take, say, 50 rupees as a formal payment and demand the rest in cash.

That cash payment is what Indians refer to as “black money”.

An under construction high-rise residential tower is pictured behind an old residential building in Mumbai, India, February 8, 2016.Image copyrightReuters

Homebuyers will almost always have to pay part of the property price in cash

It means the seller can avoid a hefty capital gains tax bill. Buyers benefit too because the lower the declared value of the property, the lower the property tax they will be obliged to pay.

What it also means is that Indians tend to have much smaller mortgages compared to the real value of their properties than elsewhere in the world.

At the peak of the property boom in the US and the UK it was common for lenders to offer mortgages worth 100% of the value of the property.

Some would even offer 110% mortgages, allowing buyers to roll in the cost of finance and furnishing their new home.

That’s why when the crash came, the balance sheets of the big banks collapsed along with property prices.

In India, by contrast, mortgage loans can only be raised on the formal house price. So, says Mr Basu, a house worth 100 rupees would typically be bought with a mortgage of 50 rupees or less.

So when prices fell in India – and they did fall in 2008 and 2009 – most bank loans were still comfortably within the value of the property.

That’s why India managed to avoid the subprime crisis that did so much damage elsewhere.

Legalising bribery

India did experience a slowdown, but it was collateral damage from the global recession rather than the result of any national problem. Indeed, within a year India had begun to pull out of the crisis, returning to growth of almost 8% a year between 2009 and 2011.

That is not to say that Mr Basu approves of petty corruption.

A selection of bank notes and coins of the Indian Rupee the currency of India

Mr Basu says only those who take bribes should be held criminally responsible

He compares it to the effect of an unpleasant disease: it may have some positive side effects – encouraging your hair to grow, for example – but you would still prefer not to have the illness.

Indeed, Mr Basu is famous for having devised a particularly clever and characteristically radical way of rooting out corruption – legalising bribery.

A few years ago, he proposed that instead of both bribe-givers and bribe-takers being held criminally responsible for their actions, only the bribe-taker should face sanctions.

It is a simple change, but radically alters the relationship between the two parties.

It means people who give bribes no longer have a shared interest in keeping their nefarious activity secret.

Freed from the risk of prosecution, bribe-givers would have a powerful incentive to reveal corruption.

Unfortunately, says Mr Basu, his innovation has still not found its way into mainstream Indian law.

Many Indians just hate credit cards. Just because a few people they know used it in all the wrong ways and got into trouble, doesn’t mean that any person who uses a credit card is irresponsible. It is important to understand that the credit card straight away wins over cash in many aspects. This article illustrates how.

Ease in travelling: Imagine you are travelling abroad. You want to buy an expensive gift for your wife, let’s say a diamond ring, which could run into some $1000, which is around Rs 60,000. Would you carry that much cash in a foreign country? If you had planned to withdraw cash from your bank account, think again. Does your debit card allow you to withdraw that much cash? No. Every bank sets limit over debit card swipes and withdrawal limits in a single day. A credit card is a clear winner in this case.

After you lose it? What will you do after you lose money or it is stolen? Do you think it can be replaced? Your credit card can be replaced after it is lost or stolen. Yes, it comes at a nominal cost, but still there is scope to replace it, but when it comes to cash? No way!

Build or repair your credit score: No, it is not like what you thought. Cash transactions and debit card transactions are not reported to Credit Information Bureau of India Limit (CIBIL) and other credit bureaus. So, you cannot build your CIBIL credit score based on debit card usage. A credit card is any day a convenient way to build your CIBIL score or repair your damaged score. Credit card usage is a manifestation of your credit behavior and also your credit card repayment pattern shows you financial disciplining.

Rewards: If used wisely, using a credit card can prove to be rewarding. Credit card companies or banks issuing these cards have tie-ups with top retailers, e-commerce websites, e-ticketing websites, malls, restaurants, cinema houses, etc. The more you spend on your credit cards, the more points you can collect, that can be later redeemed from a wide range of offerings. However, just to collect points one must not spend an amount one can’t repay to the lender. Can you think of any such rewards or freebies by spending cash?

Anything else? These days credit limit on credit cards easily touch Rs 50,000 to 1,00,000. That is how much you can buy from your credit card. Imagine carrying around that much cash? Moreover, sometime when you are extremely cash strapped you can just pay the minimum amount due on your credit card and keep sailing. Please make sure that you chose this option as one off instance and not a regular practice.

Hence, it is important to understand that the only advantage, cash offers is controlling spends. If you are one of those who do not overspend, we advise you to get yourself a credit card. It will open up a whole new world of benefits.

About the author: Rajiv Raj is the director and co-founder ofwww.creditvidya.com.